Expert advice

May 23, 2014,12.45 IST

Is your financial planner/ advisor a Fiduciary?

Suresh Sadagopan
Ladder7 Financial Advisories

Shiladitya was sitting upright – blinking furiously into the inky blackness. What was happening? Have I become blind, he wondered to himself.  He was slowly able to see the outline of the cupboard at the far end and then his eyes fell on Aditi, his wife, curled up & sleeping peacefully on the other side of the bed. I’m not blind, he heaved a sigh of relief. Even though the Air conditioner was humming & doing it’s work, he had been sweating.

Then he remembered why he got up. It was that damn project he was working on.  He had a deadline to meet and a presentation to make at 2PM the next day. He saw the time. It was 3.15AM. The presentation was not the next day, it is today, he thought to himself. He downed a swig of water and went to the adjoining room to work on the presentation.
Shiladitya was in Sales. His was a high pressure job, which he enjoyed – but these days it was getting to him. At 43 he was feeling exhausted and ancient. But, he had to continue. His children were still very young, he had two loans, one for the home & car, his wife was not working & his parents were partially dependent on him. So, he just had no option but to plod along.

For the first time, only last month, he was thinking of how soon he could retire.  Even he was able to figure out that it is not going to be possible anytime soon. He had made investments – which were made in various instruments over time. He was not sure if they would see him through. He desperately wanted some professional help. His friend Chandru suggested that he see a financial planner. Shiladitya was fine with that. But he wanted to know how he could choose a trustworthy person for advising him. He wanted to know the most important criteria to select an advisor/ planner.

Shiladitya came to me as I was Chandru’s financial planner/ advisor.  When the question was put to me, I asked him –“How much would he trust your doctor?”.  He said he trusts him implicitly for he expected the doctor to act in his best interests, always.

I told him that is called the Fiduciary level of care. Infact doctors take a Hippocratic oath which prescribes the ethics & principles that they need to follow when they deal with patients. This oath pertains to the ancient Grecian era. There are about 12 different areas on which the doctor takes an oath. Two of those are that  – the doctor will use his/her best ability & judgement while treating the patients; the doctor is to do what is best for patients & not what is good for him/her.  This is the essence of fiduciary standard.

Doctor and patient enjoy an asymmetric relationship – the patient does not know anything about the subject and implicitly trusts the doctor. The doctor, in his capacity as an adviser, would act in the best interests of the patients.

I told Shiladitya that financial planners/ advisors should also exhibit the fiduciary level of care. A fiduciary duty imposes stricter standards of behavior & the highest level of care on the principal. A fiduciary should ideally have no conflict of interest ( or minimal conflict of interest, which too is declared upfront ) and should not profit from his/her position as a fiduciary.

In fact the latest regulation from SEBI called the Investment Adviser Regulations, expressly  states that “ Advisers shall act in fiduciary capacity and shall disclose all conflicts of interests as and when they arise”. 

They need to be fee-only advisers who get a fee only from their clients and cannot get a commission/ brokerage or any remuneration from any other source .  Also, they have to meet the prescribed standards of qualifications, experience & certification.  They need to also comply with higher standards of engagement with clients, compliance, disclosures & audits.

Under this regulation, anyone giving financial advice will have to register and be bound by the conditions of the regulations. These Registered Investment Advisers ( RIAs ) are the go-to persons for advice, in view of the higher standards that these RIAs are to comply with.

Shiladitya was all ears. He was surprised that he had never heard of this regulation or about RIAs. I told him that the regulation itself is of recent vintage and the number of RIAs in the country is probably about 150. He was surprised that the numbers are so small. I told him that even SEBI is surprised by the miniscule numbers.

The next thing I thought he will ask would be what the other criteria were. I told him one needs to check the experience, standing, the quality of people and infrastructure that the planner has etc. But Shiladitya was interested in none of these. He just wanted to know how he could know who these RIAs are.

I told him that he could find that in SEBI’s site and gave him the link. He connected instantly and was going through the list. He looked up at me suddenly and said, “you are also on this list”, in a surprised tone. It was my turn to be surprised. I told him that I had to be a RIA, if I were to give advice as per regulation. There are many who have not registered and are still giving advice, but that’s incorrect.  He immediately asked me whether I would take him on as a client. I said, it depends… depends on whether he is serious about seeking advice and acting on it. He was relieved and I assured him of my commitment to adhere to the fiduciary standard.

Shiladitya confided that he can now do his job better as he already felt light that someone is going to shoulder his burden of ensuring that his commitments and goals are met.  He shook my hands with the warmth that spoke the relief he felt. He went out singing like a lark – a far cry from what he was when we started the meeting!

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